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Do You Owe Pandemic-Era Freelance Taxes? IRS 2020 and 2021 Penalty Relief May Reduce Your Tax Burden

If you owe freelance back taxes from tax years 2020 or 2021, the Internal Revenue Service (IRS)has good news: it recently announced new tax penalty relief for individuals, businesses and tax-exempt organizations that were not sent automated collection reminder notices during the pandemic. The relief is significant, totaling nearly $1.0 billion. 

The IRS tax relief applies to freelance taxes for 2020 and 2021 and due to the unprecedented effects of the COVID-19 pandemic. During this time, the IRS temporarily suspended the mailing of automated reminders to pay overdue tax bills. This process began in February 2022 as the automated IRS reminders would have normally been issued as a follow-up after the initial notice. 

Although these reminder notices were suspended, the failure-to-pay penalty was not waived for taxpayers who did not fully pay their bills in response to the initial balance due notice. Additional letters and notices are expected to go out in the coming weeks to advise those taxpayers of the penalty relief.  

The IRS is also taking steps to waive the failure-to-pay penalties for eligible taxpayers affected by this situation for tax years 2020 and 2021. The IRS estimates five million tax returns are eligible for penalty relief. If you are affected, as normal processes resume, you may receive a special IRS reminder letter that is being sent starting in January 2024. The letter will inform you of any liability, ways to pay it, and the amount of penalty relief, if applied. 

IRS Actions and Timelines for Freelance Penalty Abatement

As a first step of the pandemic-era tax relief, the IRS has adjusted eligible individual accounts and will follow with adjustments to business accounts now through early January 2024. According to the IRS nearly 70 percent of the individual taxpayers receiving penalty relief have income under $100,000 per year.

The IRS is releasing Notice 2024-7 PDF, which explains how the agency is providing failure-to-pay penalty relief to eligible taxpayers affected by the COVID-19 pandemic to help them meet their federal tax obligations.

Important Information for Freelance Taxpayers: Penalty Relief is Automatic

If you believe your freelance tax situation may be affected by this news, beware that the penalty relief is automatic. Eligible taxpayers don't need to take any action to get it. If you already paid your full freelance tax balance, you will benefit from the relief, too, the IRS will issue a refund or credit the payment toward another outstanding tax liability.

Are There Exclusions for the IRS Penalty Relief for Tax Years 2020 and 2021?

The penalty relief only applies to eligible taxpayers with assessed tax under $100,000. Eligible taxpayers include individuals, businesses, trusts, estates and tax-exempt organizations that filed certain Forms 1040, 1120, 1041 and 990-T income tax returns for tax years 2020 or 2021, with an assessed tax of less than $100,000, and that were in the IRS collection notice process, or who were issued an initial balance due notice between Feb. 5, 2022, and Dec. 7, 2023. The $100,000 limit applies separately to each return and each entity. The failure-to-pay penalty will resume on April 1, 2024, for taxpayers eligible for relief.

If the automatic relief results in a refund or credit, individual and business taxpayers will be able to see it by viewing their tax transcript. The IRS will send the first round of refunds starting in late December 2023 through January 2024. If you do not receive a refund, and think that you should, watch for a special reminder notice which may be sent with an updated balance beginning in early 2024. 

Resumption of tax collection notices begins in 2024

The IRS’s pause in collection mailings affected only follow-up reminder mailings. The IRS did not suspend the mailing of the first, or initial, balance due notices for taxpayers.

The pause meant that if you have a long-standing freelance tax debt and you have not received a formal letter or notice from the IRS in more than a year this may be because  some of this older collection work has been paused. If you do receive a tax notice that shows you have a balance or are being assessed a penalty that you were not expecting, be sure to reach out to a tax professional who can accurately answer questions regarding penalty relief on 2020 or 2021 freelance tax returns.

Jonathan Medows Jonathan Medows is a NYC-based CPA who specializes in taxes for consultants across the country. His website has a resource section with how-to articles and information for freelancers.

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